Bid conjecture lifts Heiton shares

Shares in building materials group Heiton have risen sharply on the Dublin market on speculation that the latest stakebuilding by Grafton may lead to an outright bid for the company. Heiton shares rose 28 cents to €3.50, valuing the company at €175 million (£138 million).

Grafton bought 2.42 million shares (4.88 per cent of Heiton) for €7.3 million last Friday from one of Heiton's biggest institutional shareholders, Setanta Asset Management. This has brought Grafton's shareholding in Heiton to just under 19 per cent.

There is little doubt in the market that Grafton - about three times larger than Heiton - is gearing up for an eventual bid. The only question is whether Grafton will make an agreed offer for Heiton or will simply make an offer without going first to the Heiton board.

Market sources believe Grafton is unlikely to make a hostile approach, at least initially, preferring a recommended offer possibly involving a share swop. Institutional investors are likely to welcome such a merger, but will expect it to be pitched substantially above the current €3.50 price for Heiton shares.

Heiton shares traded as high as €4 late last year and that is probably the minimum institutional investors are likely to expect from any offer. That price would value Heiton at €200 million.

At its current price, Heiton is still trading on less than eight times earnings, a 25 per cent discount to Grafton's own rating of 10 times earnings. On this basis, some institutional investors might be unwilling to accept much less than 10 times earnings for Heiton shares and this could push any offer price close to €4.40 a share or €220 million.

Against that, it is an indication of the institutional disinterest in small-capitalisation stocks that Setanta Asset Management was willing to sell almost its entire 5 per cent stake for little more than seven times Heiton's earning

Heiton's broker Davy said yesterday that its current rating failed to reflect the potential upside in the stock and the double-digit earnings growth that the broker expected over the next few years.

Grafton has consistently refused to comment on its share purchases in Heiton, which began two years ago and has cost Grafton in excess of €25 million. All it has said is the purchase of Heiton shares was for "investment purposes". It is understood that Grafton has made no formal approaches to Heiton.

Grafton had sales last year of €830 million and pre-tax profits of almost €53 million while Heiton had sales of €319 million and pre-tax profits of €19.6 million.